NEWS, EVENTS, PUBLICATIONS & EMERGING ISSUES

SW&M EMERGING ISSUE
August 14, 2009

REGULATORY EXAMINATIONS IN THE CURRENT CLIMATE

Since early 2008, the examination process for federally insured credit unions has become more rigorous, and in some cases more adversarial. The NCUA has provided some general guidance regarding its expectations in Letter to Credit Unions 08-CU-20, Evaluating Current Risks to Credit Unions. However, many credit unions whose prior examinations were favorable are now experiencing different treatment by the NCUA and by the California DFI.

It is vital to have begun the process of assessing the credit union’s loan portfolio (in particular real estate loans) for risk by obtaining AVMs on a periodic basis and obtaining updated credit scores on borrowers. The regulators will expect these steps to already have been completed before the beginning of your examination. They will also be looking for actions taken to assess consumer loan risks, and actions taken to cut back on lines of credit for borrowers whose credit has deteriorated. Further, if your credit union has not already done so, it is important to ensure that the board of directors has reviewed all lending policies and collections policies, and that those policies are updated for the current environment. The regulators will look to ensure that lending policies have limits for concentration in particular loan types (and will likely insist that those limits be in terms of percentages of net worth).

While it is clear that some correction of prior examination practices may be in order (as we have heard expressed a number of times, “the pendulum has swung”), the increased concern exhibited by the NCUA appears at times to be an over-compensation. Because of uncertainty in the economy, examiners are continuing to push for consolidation of credit unions even in the adequately capitalized and undercapitalized categories, substantial increases to allowances for loan and lease losses in the guise of “environmental reserves” but unsubstantiated by GAAP, and attempting to include cease and desist orders within documents of resolution. Further, examiners have attempted to foist open-ended conditions upon credit unions, requiring regulator approval of policies and procedures before action items would be deemed complete or restrictions lifted.

Credit unions should remember that documents of resolution are your credit union’s plans to correct problem areas and are supposed to be negotiated between the examiners and management. Even in the context of letters of understanding and agreement, credit unions should not agree to any action items with which they cannot comply without acting against the interests of the members or jeopardizing the credit union’s franchise. Credit unions should continue to work with their examiners and cooperate with the NCUA; however, we believe that in many cases credit unions need to recognize and collectively address with the NCUA the drastic change in examination style from 2006 to today.

If your credit union would like assistance regarding its examination, whether in responding to an examination report or administrative action or in complying with DOR, LUA, or Order action items, SW&M would be pleased to assist.

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